What is Corporate Restructuring?

There are primarily two ways of growth of the business organization, i.e. organic and
inorganic growth.

Corporate Growth can be Organic or Inorganic

A company is thought to be growing organically if the growth is through the internal sources
without any change in the corporate entity. Organic growth can be usually done through
capital restructuring or business restructuring. In Inorganic growth, the rate of growth of the
business is that by a collective increase in output and business reach by achieving or
accomplishing almost all the innovative businesses by way of mergers, acquisitions and take-
overs and any other corporate restructuring strategies that would create change in the
corporate entity.

Why are inorganic growth strategies regarded as fast-track corporate restructuring

strategies for growth?

Inorganic growth strategies such as mergers, acquisitions, takeovers, and spin-offs are
considered as vital engines which give assistance to companies to enter into new markets,
expand their customer base and cut competition, consolidate and grow in size quickly, to
employ new technology with regard to products, people, and processes. Therefore, inorganic
growth strategies are observed as fast-track corporate restructuring strategies for the growth
of the business.

Meaning or Defining of Corporate Restructuring

Corporate Restructuring is defined as the procedure that is involved in changing the

organization of a business. Corporate Restructuring includes making dramatic changes to
business by cutting out or integration of departments. It suggests rearranging the business for
increased proficiency and profitability. In other words, it is a comprehensive process, by
which a company can consolidate its business operations and strengthen its position for
achieving corporate objectives-synergies and continuing as a competitive and successful
entity.

Company Restructuring Involves

Restructuring chiefly comprises of layoffs or bankruptcy, even though restructuring is
generally made to minimalize the impact on the employees, if possible. Restructuring
contains the company’s sale or merger with a diverse company. The Companies practice
restructuring as the business strategy to ensure their long-term viability

Need & Scope of Corporate Restructuring

Objectives of the Corporate Restructuring

Corporate Restructuring is concerned about placing business activities of corporates as the

whole in order to accomplish certain prearranged objectives. The objectives encompass the
following:

 Orderly redirection of the firm’s activities;

 Positioning extra cash flow from 1 business to finance profitable growth in another;
 Misusing inter-dependence amongst current or potential businesses within the
corporate portfolio; — risk reduction; and
 Development of core competencies.

The scope of Corporate Restructuring encompasses:

1. Enhancing economy (cost reduction): The status allows it to leverage the same to its
own advantage by being able to raise larger funds at lower costs.
2. Improving efficiency (profitability): Reducing the cost of capital translates into
profits.

Note: Corporate Restructuring aims at different things at different times for different

companies and the single common objective in every restructuring exercise is to eliminate the
disadvantages and combine the advantages.

Needs for Corporate Restructuring

The needs for undertaking Corporate Restructuring are as follows:

(i) To focus on basic strengths, operational synergy & other effective allocation of
managerial capabilities and infrastructure too.

(ii) Consolidation and economies of scale by expansion and diversion to exploit

extended domestic and global markets.
 (iii) Revival and rehabilitation of a sick unit by adjusting losses of the sick unit with
profits of a healthy company.

(iv) Acquiring the constant supply of raw materials and access to scientific research
and technological developments.

(v) Capital restructuring by a suitable combination of loan and equity funds to

decrease the cost of servicing and improve return on capital employed.

(vi) Improve corporate performance to bring it on par with competitors by adopting

the radical changes brought out by information technology.

Important aspects to be considered while planning or implementing corporate

restructuring strategies

They are:

 Valuation & Funding

 Legal and procedural issues
 Taxation and Stamp duty aspects
 Accounting aspects
 Competition aspects etc.
 Human and Cultural synergies

Types of Corporate Restructuring Strategies

Various types of corporate restructuring strategies include 1. Merger 2. Demerger 3. Reverse

Mergers 4. Disinvestment 5. Takeovers 6. Joint venture 7. Strategic alliance 8. Franchising 9.
Slump Sale

1. Merger

The merger is the combination of two or more companies which can be merged together
either by way of amalgamation or absorption or by the formation of a new company. The
combining of two or more companies is generally by offering the stockholders of one
company securities to the acquiring company in exchange for the surrender of their stock.

Kinds of Merger:
Mergers may be –

 Horizontal Merger: It is a merger of two or more companies that compete in the

same industry. It is a merger with a direct competitor and hence expands the firm’s
operations in the same industry.
 Vertical Merger: It is a kind of merger that takes place on the combination of 2
companies that are operating in the same industry but at diverse stages of production
or distribution system. If any company takes over its supplier/producers of raw
materials, then it may result in backward integration. On other hands, forward
integration also results if a company agrees to take over the retailer or Customer
Company.
 Congeneric Merger: It is the type of merger, where two companies are in the same
or related industries but do not offer the same products, but related products and may
share similar distribution channels, providing synergies for the merger.
 Conglomerate Merger: These mergers involve firms engaged in an unrelated type of
activities i.e. the business of two companies are not related to each other horizontally
or vertically. In a pure conglomerate, there aren’t any important common factors
between companies in production, marketing, research and development, and
technology. Conglomerate mergers are the merger of various types of businesses
under 1 flagship company.

2. Demerger

The demerger is a type of corporate restructuring wherein an entity’s business actions are
separated into 1 or more mechanisms.

3. Reverse Merger

The reverse merger is the opportunity for the unlisted companies to become a public listed
company, without opting for Initial Public offer (IPO). In this process, the private company
acquires majority shares of the public company with its own name.

4. Disinvestment

It is the act of the organization or company or government for selling or liquidating an asset
or subsidiary, this is known as “divestiture”.

5. Takeover/Acquisition:

Takeover occurs when an acquirer takes over the control of the target company. It is also
known as an acquisition.

The Types of Takeover:

It may be a friendly or hostile takeover.

Friendly takeover: In this type, one company takes over the management of the target
company with the permission of the board.

Hostile takeover: In this type, one company takes over the management of the target
company without its knowledge and against the wish of their management.

6. Joint Venture (JV)

A joint venture is an entity formed by two or more companies to undertake financial act
together. The parties agree to contribute equity to form a new entity and share the revenues,
expenses, and control of the company. It may be a Project based joint venture or Functional
based joint venture.

Project-based Joint venture: The joint venture entered by the companies in order to achieve a
specific task is known as project-based JV. Functional based Joint venture: The joint venture
entered by the companies in order to achieve mutual benefit is known as functional based JV.

7. Strategic Alliance

Any agreement between two or more parties to collaborate with each other, in order to
achieve certain objectives while continuing to remain independent organizations is called a
strategic alliance.

8. Franchising

Franchising is to be defined as an arrangement wherein 1 party (franchiser) allows another

party (franchisee) the right to use its trade name along with definite business systems and
procedure, to produce and market the goods or services along with certain specifications. The
franchise generally pays a one-time franchise fee plus a % of sales revenue in terms of
royalty and gains.

9. Slump sale
Slump sale means the transfer of 1 or more undertaking because of the sale for lump sum
consideration deprived of values being allocated to each individual assets and liabilities in
such sales.